Fiscal cliff stand-off wild card for markets

The enormity of the current U.S. budgetary standoff is in the forefront of strategic thinking by the global financial community and our various comments will have to be tempered until which time as a resolution is achieved.

Overview and Observation: “No laughing matter”…..When the proposed budget “deal” was offered this week by the Democratic Party and their point man, Treasury Secretary Timothy Geithner, Senate Republican Mitch McConnell laughed in disbelief. The offer for 1.3 trillion dollars of new taxes against 450 billion of spending cuts is really no laughing matter. It shows a further “chasm” between the two major U.S. political parties. The markets showed their “disdain” by wavering back and forth in all sectors and we are once again left with no clear direction for which to base our opinions. However, on the basis that we feel a deal will be cut before the Dec. 31 deadline, we will try to offer viable suggestions for each of the markets we follow while bearing in mind, our “feeling” of a deal compromise is not “cut in stone”.

We continue to believe that if President Obama abandons his stipulation that earners of $250,000 are “millionaires and billionaires” and reverts to a more realistic $500,000 or even $1,000,000 a deal can be achieved. However, 1.3 trillion of new taxes hopefully will not fly during a recessionary trend, which we believe is accelerating in conjunction with an already accepted “recession” condition in Europe. Now for some actual information.

Interest Rates:We have switched to the March contract for U.S. Treasury bond futures. Even so our trading range assumption remains the same at 145 to 155.

March Treasury bonds closed at 149-27, down two ticks as the market is awaiting definitive finality to the current budget negotiations currently progressing in slow motion between the two rival political parties. Until which time as an agreement is or is not achieved before the Dec. 31 deadline it is almost impossible to predict the direction of interest rates and therefore the direction of Treasury bond prices. For now we maintain our expectation that prices will remain in that projected range of 145 and 155. Trading within that range can be simply stated as “buy between 150 and 145 and sell between 150 and 155”. That, of course, is for well capitalized traders.

Stock Indices: The Dow Jones Industrials closed at 13,025.58, up 3.76 points and managed a weekly gain of 0.1%. For the month however, the Dow lost 0.5%. The S&P 500 closed at 1,416.18, up 0.23 points and for the week managed a meager 0.5%. The tech heavy Nasdaq closed at 3,010.24, down 1.79 points and for the week gained 1.5%. For the month the Nasdaq managed a gain of 1.1%. We continue to view the markets as in a state of flux with businesses awaiting a definitive decision on the budget so as to determine strategies for going forward. Failure to come to a decision could prompt a return to recession, which, in our opinion, is unavoidable. The party of “Robin Hood”, i.e. “take from the rich and give to the poor” overlooks the plight of the middle class which includes small business, the “hirers” of the middle class worker. Factors such as “Obamacare” and the extension of the Bush Tax cuts remain in question but in the case of Obamacare, fining families having difficulty meeting expenses for not purchasing health care represents the transfer of responsibility of basic health care services from the Government to individual families. The ongoing failure of responsibilities of both parties is putting the economy on the “road to perdition” in my opinion. Washington is engaging in a game of Chess which the American public as”expendable” pawns. Once again I suggest strongly the implementation of hedging strategies which we have developed over the years for investors with large equity portfolios.

About the Author

John has over 40 years experience at major U.S. Brokerage firms as Manager and Director of various International Divisions and is the founder of his own trading and brokerage firms. Over the years John has gained a wealth of knowledge and experience in all aspects of investments and trading. He was also a floor trader at the Commodity Exchange in New York. He formed Acuvest in 1999 and can be reached at futures@acuvest.com.